Research articles for the 2019-05-30

A More Intuitive Formula for PEG Ratio
Chan, Leo H.
In this note, I derive a new formula for PEG ratio, utilizing the insight from Farina’s (1969) original equation and Lynch’s (1989) assertion that for a stock to be fairly valued, the PEG and earnings growth rate has to be the same. After deriving the new formula, I demonstrate how the new formula connects with the existing formula. The new formula allows for more flexibility for growth rate assumptions, is more intuitive, and easier to implement and can be used to make predictions about future price and earnings growth.

Affordable Housing and City Welfare
Favilukis, Jack Y,Mabille, Pierre,Van Nieuwerburgh, Stijn
Housing affordability is the main policy challenge for many large cities in the world. Zoning changes, rent control, housing vouchers, and tax credits are the main levers employed by policy makers. But how effective are they at combatting the affordability crisis? We build a new framework to evaluate the effect of these policies on the well-being of its citizens. It endogenizes house prices, rents, construction, labor supply, output, income and wealth inequality, as well as the location decisions of households. Its main novel features are risk, risk aversion, and incomplete risk-sharing. We calibrate the model to the New York MSA, incorporating current zoning and affordable housing policies. Housing affordability policies carry substantial insurance value but cause misallocation in labor and housing markets. Housing affordability policies that enhance access to this insurance especially for the neediest households create large net welfare gains.

Analysing Monetary Policy Statements of the Reserve Bank of India
Mathur, Aakriti,Sengupta, Rajeswari
In this paper we quantitatively analyse monetary policy statements of the Reserve Bank of India (RBI) from 1998 to 2017, across the regimes of five governors. We first ask whether the content and focus of the statements have changed with the adoption of inflation-targeting as a framework for conducting monetary policy. Next, we study the influence of various aspects of monetary policy communication on financial markets. Using natural language processing tools, we construct measures of linguistic and structural complexity that capture governor-specific trends in communication. We find that while RBI’s monetary policy communication is linguistically complex on average, the length of monetary policy statements has gone down and readability has improved significantly in the recent years. We also find that there has been a persistent semantic shift in RBI’s monetary policy communication since the adoption of inflation-targeting. Finally, using a simple regression model we find that lengthier and less readable statements are linked to both higher trading volumes and higher returns volatility in the equity markets, though the effects are not persistent.

Assessment of Implementation in EU Member States of MiFID II Requirements on Knowledge and Competence
Zunzunegui, Fernando,Corbal, Paloma
This report analyses divergencies in the implementation in EU Member States of ESMA Guidelines for the assessment of knowledge and competence, issued in December 2015 (ESMA 2015/1886). We have reviewed Member States MiFID II transposition rules on knowledge and competence requirements and have drawn some conclusions and proposals with the aim of enhancing regulatory and supervisory convergence.

Blockchain and Business Model Innovation: Designing a P2P Mortgage Lending System
Henriquez, Ricardo,cohen, itai,Bittan, Netanel,Tulbassiyev, Kanat
This paper explores P2P lending in the context of mortgage financing. While P2P lending has gained considerable traction in the consumer loan segment, it remains absent for the economically and socially important mortgage sector. Following a design research approach (most specifically, Action Design Research), the paper defines a series of questions about how a sound business model would make P2P mortgage lending feasible from a technical and business perspective. In order to provide an initial answer, a model is developed by providing a theoretical explanation and a partial formalization in Business Process Modelling and Notation (BPMN). The business model introduces artificial intelligence, blockchain/smart contracts and Business-Process-as-a-Service (BPaaS) as its main features. A preliminary evaluation of the model’s feasibility and effectiveness is offered, as a way of providing an initial prescriptive theory on a subject (P2P mortgage lending) where academic studies and business applications are basically absent.

Business Development Companies: Private Equity for Individual Investors
Kallenos, Theodosis L.,Nishiotis, George
Using the universe of Business Development Companies (BDCs) for the period 1998-2017 we examine their performance and risk adjusted characteristics and analyze the relationship between BDC returns and the traditional Private Equity Fund (PEF) returns. We find that a BDC traded factor, significantly explains the returns of the PE cash flow based indices of Ang et al. (2018), over and above other traded factors, suggesting a significant relationship between the returns of BDCs and the time varying private equity premium. The BDC traded factor does not explain the industry appraisal-based PE index returns, which however, are explained by the BDC NAV excess return, highlighting the limitations of these indices relative to a market-based PE index. A comparison of the BDC NAV returns with the returns of appraisal-based indices reveals the presence of similar, albeit weaker, smoothing biases. Finally, an event study analysis reveals significant market reactions to quarterly BDC NAV disclosures.

Changes in the Effects of Bank Lending Shocks and Development of Public Debt Markets
Choi, Sangyup
This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Common Ownership and Financial Reporting Comparability
Lou, Yun,Wang, Rencheng,Zhou, Kaitang
In this paper, we examine the effect of common ownership (i.e., instances where investors simultaneously own significant stakes in multiple firms in the same industry) on financial reporting comparability. We find that when a firm shares at least one institutional blockholder with other firms in the same industry, its financial reporting becomes more comparable to that of its industry peers. We identify a key mechanism through which the convergence of the financial reporting takes place: the hiring of an industry specialist auditor. Using the mergers of financial institutions as plausibly exogenous variation in firms’ common ownership status, we corroborate the positive impact of common ownership on the comparability of financial reporting across firms. Our finding highlights the role of common ownership as a market force in facilitating the convergence of financial reporting in the United States.

Corporate Assets and Enhancing Firm Value: Evidence from the Market for Bank Branches in the US
Jang, Karen Y.
This study examines the purchase and sale of US bank branches. Large and unproductive banks with less capital sell branches to smaller and more efficient banks with more capital. I use an event study, and find a significant increase in value for both parties. These valuation effects are driven by slightly better operating performance, faster growth in loans, and a smooth transfer of purchased deposits for buyers and by improved operating performance and no substantial decrease in the growth of loans and deposits for sellers. Overall, the evidence shows that branch dealmakers operate efficiently by reallocating branches to better uses.

Day-of-Week Effect on Stock Market Return, Volatility and Trade Volume: Evidence from Dhaka Stock Exchange (DSE)
Hassan, Md. Hashibul,Khan, Muhammad Saifuddin
This study aims to estimate the day of the week effect on the volatility of market returns and trade volume of DSE using conditional variance model. Estimates of various models used in this study indicate that the day of the week effect in DSE is present in case of return, volatility of return and trade volume. It is evident that lowest return, highest volatility, and lowest trading volume occur on Sundays. Returns of Mondays and Wednesdays are significantly low, however, trade volume is low on Mondays and high on Wednesdays. The volatility patterns found in the study, nevertheless, do not disprove the public information release hypothesis. After two days break of trading investors start their trading on Sunday with lots of new information, which lead to more adjustments in portfolios and thus produces higher volatility.

Dissection of Bitcoin's Multiscale Bubble History from January 2012 to February 2018
Jan-Christian Gerlach,Guilherme Demos,Didier Sornette

We present a detailed bubble analysis of the Bitcoin to US Dollar price dynamics from January 2012 to February 2018. We introduce a robust automatic peak detection method that classifies price time series into periods of uninterrupted market growth (drawups) and regimes of uninterrupted market decrease (drawdowns). In combination with the Lagrange Regularisation Method for detecting the beginning of a new market regime, we identify 3 major peaks and 10 additional smaller peaks, that have punctuated the dynamics of Bitcoin price during the analyzed time period. We explain this classification of long and short bubbles by a number of quantitative metrics and graphs to understand the main socio-economic drivers behind the ascent of Bitcoin over this period. Then, a detailed analysis of the growing risks associated with the three long bubbles using the Log-Periodic Power Law Singularity (LPPLS) model is based on the LPPLS Confidence Indicators, defined as the fraction of qualified fits of the LPPLS model over multiple time windows. Furthermore, for various fictitious 'present' times $t_2$ before the crashes, we employ a clustering method to group the predicted critical times $t_c$ of the LPPLS fits over different time scales, where $t_c$ is the most probable time for the ending of the bubble. Each cluster is proposed as a plausible scenario for the subsequent Bitcoin price evolution. We present these predictions for the three long bubbles and the four short bubbles that our time scale of analysis was able to resolve. Overall, our predictive scheme provides useful information to warn of an imminent crash risk.

Do the Right Firms Survive Bankruptcy?
Antill, Samuel
In US Chapter 11 bankruptcy cases, bankrupt firms can be liquidated or they can emerge from bankruptcy. The law implies the outcome should maximize creditor value. I exploit the within-district random assignment of bankruptcy judges to structurally estimate a model of bankruptcy. The estimates imply that creditor recovery plays a small role in the decision to emerge. Creditors recover substantially less than they would if the law were correctly implemented. The liquidation mistakes implied by my model are predictable at the time of filing and thus avoidable: courts could dramatically improve recovery if outcomes were determined by statistical models rather than creditor bargaining.

Does Financial Inclusion Enhance Economic Growth? Empirical Evidence from the IDB Members’ Countries
Ali, Minhaj,Haider Hashmi, Shujahat,Nazir, Muhammad Rizwan,Bilal, Ahmer
This innovative study examines the effect of financial inclusion measures by financial inclusion index (FII) on the economic growth of the Islamic Development Bank (IDB) members’ countries. The data were collected on different elements of financial inclusion and economic growth for the period 2000-2016. In order to draw multidimensional results, we have set up the panel data for 45 countries, and we estimated the GMM, 2SLS, panel VAR, and panel Granger causality tests. Based on the results of dynamic panel estimations, we find that financial inclusion index (FII) has a positive effect on economic growth. The overall FII and economic growth have bi-directional causalities with each other based on the panel Granger causality tests. Therefore, it suggests that the financial inclusion index has a positive effect on the economic growth in IDB members’ countries. These finding recommended that the policymakers should consider financial inclusion as a driver of the economic growth in the long run and has strong policy implications for the Islamic development bank members’ countries.

Does Religion Affect Credit Union Risk Taking?
Mesa Toro, Andres
There is growing recent interest about the effect that local culture, social values and norms, derived from religion have on corporate risk taking. The growing literature on this topic has provided evidence of the effect of religious adherence in reducing risk taking. However, the effect of difference in religious faiths (Catholics and Protestants) is still a matter for discussion. Credit unions offer a perfect setting for this issue, given their cooperative nature and restricted field of membership. This paper also takes advantage of a particular group of credit unions, the so-called associational faith-based, for which data on religious affiliation is manually collected. Results show that Catholic credit unions take less risk than Protestant credit unions. Differences in risk taking may be partially explained by different attitudes in terms of trust, entrepreneurship and thrift, which may lead to lending differences between the two groups. While Protestant credit unions tend to grant higher amounts of unsecured and business loans, Catholic credit unions seem to grant more real estate and automobile loans. These results contribute to the discussion on the effect of differences in risk taking behavior among different faiths. This paper also contributes to the literature on credit unions and has policy implications.

Earnings Management in Private Family Versus Non-Family Firms: The Moderating Effect of Family Business Generation
Borralho, Joao,Gallardo Vázquez, Dolores,Hernández-Linares, Remedios
The study addresses the signs of earnings management in unlisted companies, comparing the situation in family firms and non-family firms. We adopt arguments from agency theory, and stewardship theory, which are supplemented with the assumptions of socio-emotional wealth literature, to justify our research model. The sample is composed of 263 audited Spanish companies with a turnover of more than 200 million euros, which were analyzed in the period from 2011 to 2015. Results indicate that family firms are less prone to the practices of earnings management that the non-family firms, although the association between the family firm status and the earnings management is moderated by the firm generation. This work contributes to the literature on the quality of financial information in both family firms and unlisted companies, exploring new areas of research.

Ensuring Retirement Security with Simple GLIDeS
Kobor, Adam,Muralidhar, Arun
There is a growing retirement crisis and most of the focus has been on the fact that individuals are not saving enough for retirement, may not have access to pension schemes, or are financially illiterate. More critically, assets/financial products available to investors, may not be appropriate for the typical individual saving for retirement. The goal of retirement is to try to guarantee a target level of income ideally from retirement till death. Current glide path products shift from stocks to bonds based on one’s age, and this is unlikely to achieve the goal of a secure retirement income for two reasons: traditional bonds are not safe and the glide path is goal-independent. A new bond (SeLFIES) has been proposed as the safe asset for the goal of retirement income. This paper (i) addresses the second issue of glide-path products and tests a simple rule we call GLIDeS: Goal-based, Lifetime Income-focused, Dynamic Strategy that allocates between Equities and SeLFIES based on a retirement income goal; (ii) shows how GLIDeS could dominate standard portfolio choices (60/40, TDFs etc.), along with holding SeLFIES in isolation; (iii) introduces a new way to think about intermediate retirement targets to ensure one is on a safe path to retirement; and (iv) explores implications for level of savings required to achieve a retirement goal. The paper uses historical and Monte-Carlo simulation for reasonable future equity, interest rate and inflation scenarios, and concludes with how the choice of dynamic strategy is influenced by one’s savings rate, replacement rate, risk aversion and outlook on interest rate and risky assets.

Equity Autocalls and Vanna Negative Carries: Pricing and Hedging with a Simple Add-On
Salon, Gregory
Autocall products: a toxic best-seller.Over the past twenty years, the autocall pay-off has been the most traded exotic equity product. Outstandingly popular, it is mainly sold to final customers in Europe and Asia trough notes: its average yearly volumes reaches 100 billion euros. Nevertheless, it is responsible for major losses suffered by banks’ Exotic trading desks. Roughly, when the spot remains in a [80%,105%] area around the recall barrier, daily carry loss is worth 1 to 3 basis points (depending on the product complexity, as several variations exist).Indeed, it shows a strong model-dependency due to the cancellation feature: when the spot moves, books need dynamic rehedging via vanilla options, forward contracts, correlation products. As such, it requires the use of a pricing model which correctly combines market data dynamics (volatility, repo, equity correlations, quanto drifts…) and spot dynamic, in order to price properly the cost of daily rehedging.In practice, building a pricing model complex enough to calibrate the relevant covariances while remaining numerically stable and computationally reasonable has proved to be a very serious challenge. Not mentioning ultimately the need for comprehensive interpretations of outputs. Escaping this issue, we exhibit here, a convenient way to price and hedge autocalls toxic behaviors through an additional and corrective pay-off.There are approximations throughout the building of such an approach that have been tested numerically and justified qualitatively. Nonetheless, this is cheaper in terms of model complexity and development, and it provides a comprehensive and efficient pricing scheme combined with a hedging strategy which tackles the issue of negative carries generated by an autocall replication strategy.

Evaluación de la implementación en los Estados miembros de la UE de los requisitos de la MiFID II en materia de conocimientos y competencias (Assessment of Implementation in EU Member States of MiFID II Requirements on Knowledge and Competence)
Zunzunegui, Fernando,Corbal, Paloma
Spanish Abstract: El presente informe analiza las divergencias en la implementación en los Estados Miembros de la UE de las Directrices de ESMA (en sus siglas en inglés) para la evaluación de conocimientos y competencias, publicadas en diciembre de 2015 (ESMA/2015/1886). Se han revisado las normas de transposición de la MiFID II de los Estados Miembros en relación con los requisitos sobre conocimientos y competencias, y se han extraído algunas conclusiones y propuestas con el objetivo de mejorar la convergencia regulatoria y supervisora.English Abstract: This report analyses divergencies in the implementation in EU Member States of ESMA Guidelines for the assessment of knowledge and competence, issued in December 2015 (ESMA 2015/1886). We have reviewed Member States MiFID II transposition rules on knowledge and competence requirements and have drawn some conclusions and proposals with the aim of enhancing regulatory and supervisory convergence.

Fair-Value Estimates of the Cost of Federal Credit Programs in 2020
Office, Congressional Budget
The federal government supports some private activities by providing credit assistance to individuals and businesses. CBO shows two kinds of estimates of the lifetime costs of those credit programs: estimates created by following procedures prescribed by the Federal Credit Reform Act of 1990 (FCRA); and estimates that account for the market value of the government’s obligations, which are called fair-value estimates.

Foreign Capital and Earnings Management: International Evidence from Equity Market Openings
Hou, Fangfang,Ng, Jeffrey,Rusticus, Tjomme O.,Xu, Xinpeng
The opening of equity markets to foreign investors provides financing opportunities and disrupts the stock ownership structure of the firms in these markets. In this paper, we study how this affects firms’ earnings management in the opening’s immediate aftermath. Using a broad set of countries that opened their equity markets, we find a significantly positive effect on firms’ income-increasing earnings management in the year of opening. We show that there are substantial heterogeneous effects across industries and firms. The positive effect is more pronounced in industries that are more dependent on external financing and for firms that are financially constrained, suggesting that firms’ intrinsic need for equity finance contributes to income-increasing earnings management behaviors. In addition, the effect is weaker when the firm is audited by a Big N auditor, consistent with the monitoring effect of relatively more reputable auditors. We find that income-increasing earnings management is less pronounced in countries with better funded securities regulators and that it is more pronounced in countries with greater corruption. Overall, our results suggest that incentives to attract financing when a country opens its equity market to foreign investors affects firms’ reporting bias.

Heuristics in Multi-Winner Approval Voting
Jaelle Scheuerman,Jason L. Harman,Nicholas Mattei,K. Brent Venable

In many real world situations, collective decisions are made using voting. Moreover, scenarios such as committee or board elections require voting rules that return multiple winners. In multi-winner approval voting (AV), an agent may vote for as many candidates as they wish. Winners are chosen by tallying up the votes and choosing the top-$k$ candidates receiving the most votes. An agent may manipulate the vote to achieve a better outcome by voting in a way that does not reflect their true preferences. In complex and uncertain situations, agents may use heuristics to strategize, instead of incurring the additional effort required to compute the manipulation which most favors them. In this paper, we examine voting behavior in multi-winner approval voting scenarios with complete information. We show that people generally manipulate their vote to obtain a better outcome, but often do not identify the optimal manipulation. Instead, voters tend to prioritize the candidates with the highest utilities. Using simulations, we demonstrate the effectiveness of these heuristics in situations where agents only have access to partial information.

Informal Sector and Mobile Financial Services in Developing Countries: Does Financial Innovation Matter?
Jacolin, Luc,Massil Joseph, Keneck,Noah, Alphonse
This paper investigates the impact of mobile financial services â€" MFS (mobile money, and mobile credit and savings) on the informal sector. Using both parametric and non-parametric methods on panel data from 101 emerging and developing countries over the period 2000-15, we find that MFS negatively affect the size of the informal sector. According to estimates derived from propensity score matching, MFS adoption decreases the informal sector size in a range of 2.4 â€" 4.3 percentage points of GDP. These formalization effects may stem from different possible transmission channels: improvement in credit access, increase in the productivity/profitability of informal firms attenuating subsistence constraints typical of entrepreneurship in the informal sector, as well as possible induced growth of firms already in the formal sector. The robustness of these results is supported by the use of an alternative estimation approach (instrumental variables). These findings lay the groundwork for the scarce literature on the macroeconomic impact of mobile financial services, a major dimension of the growing drive towards economic digitalization.

Inside the 'Black Box' of Private Merger Negotiations
Liu, Tingting,Officer, Micah S.
This paper enables a detailed look inside the “black box” of merger and acquisition (M&A) negotiations before the first public bid is announced. We find that bid revisions are very common in the pre-public phase of a deal, and that price revisions during the private negotiation window are associated with changes in the public-market values of the acquisition target. We further find that target firms’ earnings releases during the private negotiation process have a significant impact on bid revisions. We also investigate whether the nature of the bid process has an impact on pre-public takeover price revisions and examine the strategic difference in bidding in deals that are initiated privately by a bidder other than the winning bidder. We interpret our results as consistent with the notion that the behavior of target managers in the private negotiation window appears congruent with shareholder wealth maximization.

Jim Crow Credit
Baradaran, Mehrsa
The New Deal created a separate and unequal credit marketâ€"high-interest, non-bank, installment lenders in black ghettos and low-cost, securitized, and revolving credit card market in the white suburbs. Organized protest against this racialized inequality was an essential but forgotten part of the civil rights movement. After protests and riots drew attention to the reality that the poor were paying more for essential consumer products than the wealthy, the nation’s policymakers began to pay attention. Congress held hearings and agencies, and academics issued reports examining the economic situation. These hearings led to new federal agencies and programs, executive actions, as well as several acts of legislation. These Congressional investigations and the theories and explanations emanating from policymakers and academics were the genesis of decades of legislation aimed at supporting minority banks and other institutions. The resulting policy framework is still in effect and includes: the Community Reinvestment Act (CRA), the Community Development Financial Institution Act (CDFIA), as well as several key provisions and mandates regarding minority banks in banking legislation. In this Article, I will argue that the foundational theoretical premise of these laws and policies is flawed. Though policymakers and scholars accurately diagnosed the root causes of the disparate credit market, the solutions did not correspond with the problem and have therefore been ineffective. These laws and policies were not aimed to address the systemic causes of the disparity but only served to treat its symptoms. The misguided focus on small community banking, minority-owned banks, and mission-oriented institutions as a response to structural inequality has been the dominant framework in banking reform.In analyzing the varied, but theoretically consistent response to lending inequality, this Article also challenges a long-standing banking myth that “small community banking” or “microfinance” is the answer to poverty, specifically for marginalized communities. This idea was the foundational theory of the minority banking industry, the CRA, the CDFIA, and almost every legislative response to credit inequality for the past fifty years. The premise of these laws is that that marginalized communities, having been left out of the dominant banking industry, will pool their resources and collectively lift themselves out of poverty. As such, these laws are rooted in neoliberal and libertarian concepts of banking market even as they have been championed by progressive reformers and community activists. For most policymakers, activists, and scholars, the buzzword is “community empowerment” and they have legislated accordingly. In doing so, they have avoided addressing the root causes of the problem and have shifted the responsibility of a solution to the disenfranchised communities themselves instead of devising comprehensive federal policy solutions. This Article will trace the genealogy of this legislation and offer solutions that will address the root causes of this inequality.

Local Currency Bond Returns in Emerging Economies and the Role of Foreign Investors
So, Inhwan,Valente, Giorgio,Wu, Jason
Foreign investors play a key role in EME sovereign bond markets, in part because their portfolio flows are sensitive to bond returns and are therefore pro-cyclical in nature. This note discusses the implications of the framework proposed by So et al. (2019) which incorporates the risk that arises from the portfolio performance and flows of actively managed bond funds. When the framework is applied to the data, using local currency sovereign bonds of 16 EMEs, preliminary calculations show that local currency sovereign bonds that positively covary with the returns of active funds receive risk premia as compensations for active fund risk. Furthermore, and in line with theory, the price of this risk increases when bond funds experience outflows and the exposure to active funds risk increases with the heightened price of risk. This double effect helps explain why spikes in returns of some EME local currency bonds can be especially large. These results demonstrate how the portfolio performance and flows of actively managed funds help transmit shocks across EMEs.

Managerial Ability and Intangible Assets: Evidence From Purchase Price Allocations in Mergers and Acquisitions
Kwon, Shin Hyoung,Ye, Tingting
We examine the relationship between managerial ability and recognized intangible assets, including goodwill and other assets acquired in mergers and acquisitions (M&As). We find that managerial ability is positively associated with the amount of intangible assets acquired in M&As. Furthermore, managerial ability affects the purchase price allocation of these assets and is more positively related to goodwill than to other intangible assets. Finally, cross-sectional analyses reveal that the relationship between managerial ability and intangible assets acquired in M&As is mainly driven by acquirers with domestic, public, or related targets, whose information is more easily accessible.

Modeling Dynamic Causalities between the Indonesian Rupiah and Forex Markets of ASEAN, Japan and Europe
Sofyan, Hizir,Majid, M. Shabri Abd.
Historically, the Indonesian Rupiah (IDR) has fluctuated throughout the years, and its fluctuations have been very much interrelated with other forex markets. Since the IDR fluctuations impact national economic growth, investigating the movements of forex markets with respect to the IDR provides important policy implications. Due to limited previous studies investigating the interactions between the IDR and forex markets, this study explores the dynamic causality over both the short and long run between the IDR and the forex markets of ASEAN (Association of South East Asian Nations), Japan and Europe. The study utilizes the daily nominal exchange rates of Indonesia, Thailand, Malaysia, Singapore, the Philippines, Japan, the U.S., and Europe spanning from January 1, 2008, to December 31, 2015. These data were then analyzed using the cointegration and vector error correction (VECM) techniques. The study found that the IDR was cointegrated with the forex markets of ASEAN, Japan, and Europe. The IDR was found to be the most dependent market compared to the other ASEAN forex markets since those forex markets appeared to have close causal linkages between them. For multivariate causalities, the Philippine Peso was found to be the only forex market that was independent of both the Japanese and European forex markets. Additionally, the ASEAN forex markets were more influenced by the forex markets of Japan rather than those of Europe. Since the forex markets become more integrated regionally, there is a need for policy synchronization among those countries in order to manage the impacts of forex fluctuations.

Monetary Policy and Bank Profitability in a Low Interest Rate Environment: A Follow-Up and a Rejoinder
Goodhart, Charles,Kabiri, Ali
There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely.

Must Former Client Arbitrate Fee Dispute With Law Firm When Arbitration Clause Was Embedded in a Noncompliant Contingent Fee Contract? â€" Texas Judges Not of One Mind
Hirczy de Mino, Wolfgang P.
Quasi-Experimental Approach to the Analysis of Appellate Adjudication: Study #1: Judicial Treatment of an Attorney-Client Arbitration Agreement Embedded in a Contingent Fee Agreement That Does Not Comply With the Applicable Statute of Frauds. The Texas Government Code requires that "a contingent fee contract for legal services must be in writing and signed by the attorney and client." TEX. GOV'T CODE ANN. § 82.065(a). What if such an attorney-client contract does not comply with the statute, but provides for arbitration of any subsequent disputes? Will the arbitration clause be enforceable when embedded in a contract that may itself be void or voidable? Four attorney-client disputes under such a legal services agreement have made it to the appellate level, but have not yielded the same results, nor consistent legal reasoning supporting the disposition. These cases provide an intriguing opportunity to examine the judicial process under somewhat controlled conditions: Same attorney as party, same contract, same legal issues, but different courts, different judges, different procedural routes to the court of appeals, and different outcomes. The underlying facts and the key legal questions in these cases are identical or nearly so (i.e. they are constants), while the judicial process variables are not. What explains the difference in outcomes? While not offering definitive conclusions, this paper endeavors to exemplify a mode of inquiry and analysis that promises greater analytical leverage and is stronger than a one-shot case-study (N=1) and also goes beyond a purely doctrinal analysis of the legal issues. The fact that judicial decision-makersâ€"all sworn to apply the law faithfully and correctly--ruled inconsistently, even on appeal, raises the question as to what the correct decision is, or should be, and whether the Texas Supreme Court should resolve it to provide certainty and uniformity in the law governing attorney-client contracts in contingent-fee cases throughout the state. For political scientists, it also raises the question what extrinsic nonlegal factors have a bearing on the observed variation in the decisional behavior of judges when faced with the same factual and legal scenario. Summary Description of the Data Constellation for Quasi-Experimental Analysis and Findings Constant factual basis for legal dispute in all cases: Same law firm’s contingent fee agreement for personal injury cases that says it is subject to arbitration under the Texas Arbitration Act (TAA) but also contains a paragraph that subjects the contract to the Federal Arbitration Act (FAA) and to the rules of the American Arbitration Association (AAA). Constant legal issue in all cases: Validity and enforceability of attorney-client arbitration clause when the contingent fee agreement of which it is a part does not comply with applicable state law. Heterogeneity in adjudicators: Three different courts of appeals (4th, 5th, and 13th) and different trial courts/judges in each case. Heterogeneity in appellate vehicles: 3 interlocutory appeals, 2 mandamus petitions, one of which was consolidated with an interlocutory appeal from the same trial court order. Variations in appellate outcomes: Law firm won three interlocutory appeals, but one win drew a dissent. One former client succeeded with a challenge to an order compelling arbitration issued by the trial court through a mandamus proceeding against the trial judge. Variations in trial court orders and resultant case posture for appeal: 1 trial court judge granted summary judgment to former client on arbitrability issue, 1 denied law firm’s motion to compel arbitration, and 2 entered orders imposing a stay on arbitration that law firm had already initiated. Win/loss ratio on arbitration issue in trial court prior to appeal: Law firm lost to former client 3 times out of 4 at the trial court level. Overall win/loss tally on arbitration issue after appeal(s): Law firm prevailed 3 times in its efforts to compel arbitration and lost 1 time when an ex-client persuaded the court of appeals to lift a trial court order compelling her to arbitrate. Variation in judicial behavior: Out of a total of 15 judges/justices, 8 ruled in favor (or voted in favor) of arbitration and 7 against. Even considering that the courts of appeals have the power to correct or otherwise overrule the trial courts, the ultimate outcome was inconsistent. Appellate opinion cites for the four cases: (1) Henry v. Gonzalez, 18 S.W.3d 684 (Tex.App.-San Antonio 2000, pet. dism'd by agr.) (order denying arbitration reversed under the TAA; FAA held inapplicable) (2) In re Godt, 28 S.W.3d 732 (Tex. App.-Corpus Christi 2000, original proceeding) (order compelling arbitration reversed by mandamus on former client’s petition; FAA held inapplicable) (3) Law Office of Thomas J. Henry v. Jonathan Cavanaugh, No. 05-17-00849-CV (Tex.App.- Dallas, May 7, 2018, pet. denied) (trial court’s order staying arbitration entered under the TAA reversed; FAA preemption mentioned in dicta). (4) Law Office of Thomas J. Henry v. Priscilla Garcia, No. 13-18-00275-CV (Tex.App. â€" Corpus Christi, Feb. 25, 2019, no pet.) (trial court’s order staying arbitration under TAA reversed; same court’s prior opinion in Godt distinguished on the facts.)

On the Relation between Financial Reporting Quality and Country Attributes: Research Challenges and Opportunities
Isidro, Helena,Nanda, Dhananjay,Wysocki, Peter D.
We provide new evidence on the co-dependence among the many country attributes previously linked to financial reporting quality. First, we show that the synchronicity of 21 changing country attributes spikes surrounding mandatory IFRS adoption. Thus, while IFRS adoption “explains” increased reporting quality, this finding disappears after including other changing country determinants of reporting quality. Second, a single underlying factor distills the numerous reporting quality measures used in the international literature. Finally, we document that four underlying country factors largely subsume the individual explanatory power of 72 candidate country attributes in explaining reporting quality levels across countries. We conclude with implications and suggestions for future research on international reporting quality.

Robust measurement of innovation performances in Europe with a hierarchy of interacting composite indicators
Salvatore Corrente,Ana Garcia-Bernabeu,Salvatore Corrente,Teemu Makkonen

For long time the measurement of innovation has been in the forefront of policy makers' and researchers' agenda worldwide. Therefore, there is an ongoing debate about which indicators should be used to measure innovation. Recent approaches have favoured the use of composite innovation indicators. However, there is no consensus about the appropriate methodology to aggregate the varying dimensions of innovation into a single summary indicator. One of the best known examples of composite innovation indicators is the European Innovation Scoreboard (EIS). It is a relevant tool for benchmarking innovation in Europe. Still, the EIS lacks a proper scheme for weighting the included indicators according to their relative importance. In this context, we propose an appraisal methodology permitting to take into consideration the interaction of criteria and robustness concerns related to the elicitation of the weights assigned to the elementary indicators. With this aim, we apply the hierarchical-SMAA-Choquet integral approach. This integrated multicriteria decision making (MCDM) method helps the users to rank and benchmark countries' innovation performance taking into account the importance and interaction of criteria assigned by themselves, rather than equal weights or weights exogenously fixed by external experts.

Short Interest, Macroeconomic Variables and Aggregate Stock Returns
Priestley, Richard
Rapach, Ringgenberg and Zhou (2016) claim that for the sample period 1973 to 2014 "short interest is arguably the strongest known predictor of aggregate stock returns", that it "outperforms a host of popular predictors", and that it represents "informed traders who are able to anticipate changes in future aggregate cashflows". We show that the entire evidence regarding these claims disappears if we exclude data on short interest for the calendar year of 2008 when the financial crisis had its largest impact on stock markets. In contrast, we show that macroeconomic variables can predict aggregate returns and combining forecasts based on macroeconomic variables provides consistent and stable forecasts in periods that include and exclude the financial crisis.

Sometimes Silence is Golden: 'Dell Compliance' Following Aruba III
Kass, Michael
Speculation that interpersonal conflicts among Delaware judges influenced the adjudication of Verition Partners v. Aruba Networks has unfortunately chilled a more productive discussion of the three judicial opinions in this case â€" decisions whose subtext is key to interpreting the Delaware Supreme Court’s final determination on the case rendered last month. That opinion, “Aruba III”, simultaneously elevated the importance of the “Dell Compliance” standard â€" that threshold of M&A process adequacy above which the Chancery Court should lend weight to deal price in appraisal proceedings â€" while saying almost nothing about how that standard should be administered. Aruba III concluded a rich colloquy between Vice Chancellor Travis Laster and the Delaware Supreme Court that began with Dell in which both courts utilize reductionist arguments to debate the appropriate implications of modern ECMH theory for the adjudication of appraisal fair value in public company M&A. While often used to normatively criticize reasoning, reductionism â€" the practice of analyzing complex phenomenon by reference to simplified abstractions held to represent more fundamental principles â€"is simply used in its descriptive sense here (for want of a better term). While not inherent, reductionist reasoning in judicial opinions yields tricky precedent because the assumptions that underlie its abstractions are often poorly defined and evaluated for materiality, reducing confidence in how well they track reality. In the Dell and three Aruba decisions, reductionism in the translation of ECMH “principles” to economic reality is used so frequently and with such lax tracking of assumptions that analysis of the literal reasoning in these decisions provides little guidance on how the Chancery Court should determine Dell Compliance. Conversely, a review of their styles of argumentation is more illuminating. When evaluated in this light, Aruba III clarifies that, while couched in terms of the deference to “ECMH principles”, the bounds on the Chancery Court’s discretion found in Dell and DFC were motivated by the desire to focus public-company appraisal on atypically poor and transaction-specific process defects to avoid the categorical application of de novo valuation to broad categories of M&A transactions. By casting Dell and DFC as outlier cases in which identified process defects were simply too generically relevant and non-specific to the case record, Aruba III liberates the Chancery Court, should it so choose, to continue to utilize public company appraisal to police fiduciary misfeasance under a flexible “all relevant factors” standard, but only when process defects fall outside structural failings of “run-of-the-mill” processes and are linked to the deal price based on record evidence. By remaining silent on Dell Compliance beyond these requirements of atypicality and specificity, this bounded but consciously undefined standard appears designed to frustrate both the attempts of transaction attorneys to circumvent functional process review via formalism and the attempts of petitioners to indiscriminately pursue claims based on categorical case theories. Rather than an oversight, such silence may strike the perfect balance of preserving a useful role for public-company appraisal to improve the increasingly feckless state of post-Corwin fiduciary law, while discouraging unfettered appraisal “arbitrage”.

The Effect of Algorithmic Trading on Voluntary Disclosure
Stephan, Andrew
I investigate whether algorithmic trading (AT) affects voluntary disclosure. I predict that AT’s advantage over non-algorithmic investors decreases information acquisition. Because investors are less informed, managers increase disclosure to reduce information asymmetry. I find evidence consistent with these predictions; AT is positively associated with the likelihood and quantity of management guidance issued. Further, when AT is high, informed trading is more costly, information acquisition is lower, and investors are less informed prior to management disclosures. This question is important to academics, regulators, and the investing public due to the debate over the desirability of AT in capital markets.

The Strength of Argumentation in Management Revenue Forecasts â€" Do Financial Analysts Care?
Hursti, Kristian
In this paper, I examine the relation between the strength of the management revenue forecast argument and three outcomes, 1) ex post forecast accuracy, 2) incidence of analysts who revise their estimates, and 3) convergence in analysts’ beliefs. My sample comprises 201 full-year revenue forecasts by 131 European companies listed on the STOXX Total Market Index during crisis years 2008 and 2009. I use the Claim-Data-Warrant argumentation scheme by Stephen E. Toulmin (1958) to assess the strength of the textual forecast argument. I find that the odds that management revenue forecasts meet their target increase as the strength of the forecast argument increases. This indicates that the contemporaneous warrant of the revenue forecast argument might be considered as an alternative to ex post verification. However, on a reduced sample of 161 observations by 111 firms, I find the warrant and the incidence of analysts who update their estimates to be unrelated. Instead, I do find the warrant to be related to increased agreement in analysts’ beliefs. More specifically, when the forecast argument is either credible or highly credible, the percentage convergence in analysts’ beliefs is significantly greater than when the argument is not credible. Moreover, the impact is not sensitive to forecast imprecision. The results indicate that the warrant carries information that analysts might find value-relevant.

The Value of Academics: Evidence From Academic Independent Director Resignations in China
Chen, Jun,Garel, Alexandre,Tourani-Rad, Alireza
In this paper, we use academic independent director resignations induced by the introduction of the Regulation 11 prohibiting academics from holding positions in Chinese public companies to examine their contribution to firm value. We document a negative market reaction to the issuance of the Regulation 11 and to the academic director resignations. The negative market reaction to academic director resignations is sizeable and hold when we further control for the influence of director, board, and firm characteristics. We next use heterogeneity in the market response to academic director resignations to study what the market values in academic directors. We find supportive evidence of monitoring, advising, and networking value contributions. Finally, we show that in the two years following the issuance of the Regulation 11, companies with at least one academic director on their board prior to Regulation 11 underperform relative to companies without any academic directors. Overall, our results are consistent with a positive contribution of academic independent directors to firm value.

Two Fundamental Principles for Cash Flow Valuation (CFV)
Tham, Joseph,Velez-Pareja, Ignacio
In this note, we discuss two fundamental principles for Cash Flow Valuation (CFV). We hope that adherence to these two principles will improve the practice of CFV. These principles are general, relatively uncontroversial, and should be acceptable as starting points for cash flow valuation. Principle One is on the conservation of cash flows. Principle Two is on the conservation of the (present) values that correspond to the cash flows in Principle One. We illustrate the application of these two principles with a simple numerical example.

Финансијализација као узрочник и мултипликатор кризе (Financialization as a Cause and Multiplier of the Crises)
Bukvic, Rajko,Ocić, Časlav
Serbian Abstract: У раду се разматра финансијализација као процес претварања финансијског капитала у фиктивни и виртуелни капитал и његово раздвајање од реалне, производне сфере. Указује се на огроман пораст финансијског сектора у последњим деценијама 20. и почетком 21. века и све већу разуÑ'еност финансијских инструмената као последице финансијских иновација усмерених, поред осталог, на избегавање ефеката регулативних мера државе, што доводи до његовог све већег утицаја на кретања у реалној и финансијској сфери и стварања услова за избијање финансијских криза. Савремене рецесије, попут ове која је избила 2007, имају мало заједничког са стандардним цикличним колебањима која је Шумпетер описао као стваралачко разарање. Оне нису под утицајем колебања инвестиција у реалној сфери већ су продукт описаних процеса одвајања финансијске од реалне сфере која је постала нејака да издржи огромну финансијску надградњу уздигнуту над њом. Срастање финансијског капитала с корпорацијама и државом омогућилo је учвршћење снажног олигархијског капитала оличеног у тријади Ð'олстрит â€" Министарство финансија САÐ" â€" ММФ која држи фактичку финансијску, економску и политичку власт у САÐ" и у свету. У том смислу и приче о регулацији и дерегулацији постају ирелевантне, као што је показала управо актуелна криза: процеси финансијализације припремили су терен за избијање криза, а регулативне и друге државне мере могу само да (пре)усмеравају огромне финансијске токове и да темпирају и дозирају снагу кризе.Russian Abstract: Статья рассматривает финансиализацию как процесс трансформации финансового капитала в фиктивный и виртуальный капитал и его отделение от реальной, производственной сферы. Авторы показывают на громадный рост финансового сектора в течение последних декад XX и в начале нового столетия и всÑ' большую расчлененность финансовых инструментов как последствие финансовых нововведений направленных, между прочим, к уклонению от регулятивных мероприятий государства, ведущих к всÑ' большему его влияниу на тенденции в реальной и финансовой сфере и образованию условий для возникновения финансовых кризисов. У современных рецессий, подобных возникшей в 2007, мало общего со стандартными циклическими колебаниями, описанными Шумпетером как созидательное разрушение. Они не есть под влиянием колебаний инвестиций в реальной сфере, но являются продуктом описанных процессов отделения финансовой от реальной сферы, становившейся совсем немощной для столь большой финансовой надстройки воздвигнутой над неÑ'. Сплетение финансового капитала с корпорациями и государством сделало возможным укрепление мощного олигархического капитала олицетворÑ'нного в триаде Уолл Стрит â€" Министерство финансов â€" ÐœÐ'Ф, в руках которой находятся фактическая финансовая, экономическая и политическая власти в США и в мире. Ð' связи с этим, говорить о регулировании и дерегулировании становится незначимым, как это показал актуальный кризис: процессы финансиализации подготовили возникновение кризиса, а регулятивные и другие мероприятия государства могут только (пере)направлять огромные финансовые потоки и определять время и мощь возникновения и проявления кризиса.English Abstract: The paper deals with financialization as a process of converting financial capital into fictive and virtual capital, and its separation from the real, productive sphere. It points to the enormous growth of the financial sector during the last decades of the 20th and the beginning of the 21st century, and the increasing dispersal of financial instruments as a consequence of financial innovations whose purpose, among other things, is to avoid the effects of state regulatory measures, resulting in their growing influence on movements in the real and the financial sphere and on the creation of conditions for the appearance of financial crises. Contemporary recessions, such as the one that broke out in 2007, have very little in common with standard cyclical fluctuations to which Schumpeter referred as «creative destruction». They are not influenced by fluctuations in the real sphere but are, rather, a product of the above-described processes of separation of the financial and the real sphere, which has grown too weak to sustain the huge financial superstructure that has been erected over it. The convergence of financial capital with corporations and the state has resulted in the consolidation of a powerful mass of oligarchic capital, embodied in the Wall Street â€" U. S. Department of Finance â€" IMF triad, which de facto holds the financial, economic and political power in the U.S. and the world. In that sense, all talk about regulation and deregulation becomes irrelevant, as the current crisis has shown: the processes of financialization prepared the way for the onset of the crisis, while regulative and other state measures can only (re)direct huge financial flows and control the timing and dosage of the strength of the crisis.